Should you use debt consolidation loans for collection accounts?
William Shakespeare penned the phrase “a rose by any other name smells as sweet” in Romeo and Juliet. The reference implies that names do not always reflect who we really are. You can make a similar inference for providers in this industry.
Many companies offer debt consolidation for collection accounts using similar sounding names, yet their inner workings and implication for consumers are vastly different. Determine for yourself, which is most suitable for your specific needs, a settlement or management program, or a new loan.
Debt Consolidation Programs for Collection Accounts
Debt consolidation programs for collection accounts are not loans, which you may not qualify for anyway, and may not be the best overall fit. Banks rarely lend to consumers with existing payment problems.
The companies cater to consumers having financial difficulty. You do not need a good credit score to qualify. The two options you may want to explore before borrowing more money are settlement and management programs.
A debt settlement program operates by combining your outstanding unsecured obligations, including any trades referred to a collection agency. You begin making payments into a savings account managed on your behalf by the company.
The company contacts your creditors and attempts to negotiate a settlement. A successful settlement means you may owe less money than you did before. Your creditors may agree to a settlement on the theory that something (less than the full amount owed), is better than nothing (what you are paying them now).
A settlement may not affect your risk score. While it does result in a negative mark on your consumer report, if the accounts were already in collections, you are swapping one black mark for another.
The government does not evaluate consolidation programs, so do your homework before taking the next step. At least, verify that the provider has a decent rating from the Better Business Bureau.
A debt management program is very similar, with some minor differences. A trained counselor will help you establish a budget, and you will begin sending a single payment to the company, rather than multiple collection agencies.
They will negotiate on your behalf to reduce late fees, interest rates, and other charges. This may reduce the amount of money you must pay over time, and help you install a system to stay on track in the future.
Debt Consolidation Loans for Collection Accounts
Debt consolidation loans provide you the funding needed to pay your collection accounts in full. This may keep the agencies from harassing you, and give you some breathing room by spreading payments out over time. However, it does not reduce what you owe, and may not be the ideal solution to your problem.
Apply for a debt consolidation loan if this step makes sense for your situation after reading about your ability to qualify, the statute of limitations implications, interest rate considerations, and aging of trade lines from your consumer report.
Ability to Qualify
Debt consolidation loans for collection accounts are not easy to obtain. You must meet the lender’s underwriting criteria, which include employment and income, home ownership, and credit score.
People with serious delinquencies rarely have good credit scores. When the agency reports the outstanding balance to the bureaus, the credit score reflects this black mark. This hurts your score, which in turn makes it more difficult to qualify.
On the other hand, not every agency reports right away to the bureaus. They may contact your first, and may delay reporting if you begin communicating and making payments. This means your score may be high enough to meet the underwriting criteria.
Statute of Limitations
Consider the statute of limitations before taking out a debt consolidation loan to retire your collection accounts. Each state establishes different rules for how long the agency can sue in a court of law in order to compel payment of an outstanding amount.
If you open a new obligation in order to pay off an old one, you reset the statute of limitations. This means that you are giving the new creditor more time to sue you in court should you fall behind again.
A debt consolidation loan will charge you interest while the collection agency may or may not. It all depends on the type of obligation, and the legal language in the contract that you originally signed.
For example, credit card issuers normally require new members to sign a legal agreement, which often spells out in detail the interest rate implications. On the other hand, many healthcare providers have very poor financial disclosure documentation. Therefore, agencies often cannot charge interest on medical obligations.
Aging from Report
Consider how long a collection account will remain on your consumer report and affect your risk score before taking out a debt consolidation loan. Negative information automatically ages from your file seven years after the day you first became delinquent.
You can wait for the negative information to age from your file. You will still owe the money, but the black mark disappears, and your credit score immediately improves. This makes it easier to qualify.
You can apply while the negative information still appears on your file. If approved, and if you use the funds to retire your older obligations, the agency will report that the trade line as “paid collection account.” This changes a black mark to a gray mark, which ages from your file on the same timetable.
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